Biden tax plan weighs on stocks, Bitcoin tumbles

Morning Note

European equity indices opened a tad lower on Friday morning after stocks fell on Wall Street on reports Joe Biden is planning to slap much higher capital gains taxes on the wealthy. This was always part of the equation when we looked at the implications of a Biden presidency, but markets have been pepped up on a mix of fiscal stimulus, the Fed’s extraordinarily accommodative stance, a strong cyclical impulse from the vaccine-led reopening and a bounce back in earnings. The major averages fell in lockstep, dropping by almost 1% , though the Russell 2000 ended the session flat as the selling was led chiefly by the longer-term growth names like Tesla and Amazon. The Dow Jones finished the day at 33,815, a decline of more than 300 pts. The S&P 500 closed down 0.92% at 4,134 and the Nasdaq Composite notched a similar decline to finish at 13,818. The FTSE 100 opened lower and is heading for a decline of more than 1% for the week. As of send time the CAC 40 had inched into the green. I would not describe risk as being offered as such; it’s been a pretty choppy week and I would be equally unsurprised if stocks turned around this afternoon and ended the week higher as I would if Wall Street led a sharp decline into the weekend.

The Biden administration is looking to raise the top marginal income tax rate to 39.6% from 37%, whilst also doubling capital gains tax to 39.6% for people earning more than $1 million. Tax the rich, hand it out to the poor. Sounds like furlough, but on a permanent basis. The big problem (one of many) in all this is the Senate – it would require support of all the Democrats in the upper chamber and this is far from assured. Stocks would probably be a lot lower if investors were really worried, and I think markets can overcome this move, even if it manages to pass through the Senate, which I don’t think it will. Nevertheless, coming off record highs and a good run up through the start of the year, the macro picture not really changing, rising Covid cases globally, strong earnings and other supportive factors largely priced in and the extent to which investors are ‘all in’ equities, we could be set for a downwards move in equities over the coming weeks. Beware seasonal factors (I dare not say ‘sell in May’…)

The economic picture continues to improve in the US. Initial claims for unemployment insurance fell to 547,000 last week, down from 576,000 the prior week and below the roughly 600,000 estimated. The number of continuing claims also fell.

Likewise, UK retail sales numbers were very positive in March as consumers opened their wallets ahead of the reopening of non-essential shops. Sales rose by 5.4% from February, well ahead of the 1.5% expected. Clothes, gardening goodies and specialist food items from bakers and butchers were in vogue.

Even Europe is showing immense resilience in the face of lockdowns – France’s Services PMI came in at 50.4 against 46.7 forecast, whilst the manufacturing survey surged to 59.12. The composite PMI rose to 51.7 from 50 previously, with the outperformance in services meaning it easily beat the 49.4 expected. Germany’s composite PMI came in at 56, still in expansion territory, but short of the 57 expected and down from the 57.3 in March.

The dollar is offered in early trade, with EURUSD jumping to 1.2050, Yesterday’s ECB presser high of 1.2070 is the main target for bulls. GBPUSD also tried to sustain a rally to 1.39 but hit resistance at 1.3890 and reversed a touch.

The euro remains steady following yesterday’s ECB meeting, which left markets on an even keel as the central bank managed to maintain its dovish stance and fend off chatter about wrapping up its emergency bond buying programme. Christine Lagarde played down any taper talk, saying this was ‘premature’ and that the recovery still has a long way to go. The yield on 10-year German bunds moved lower.

Bitcoin prices have tumbled. Spot trades under $48k this morning, meaning it’s down 25% from last week’s all-time high. The low tested several times in Feb at $44k is the big support. Basically, it seems to have been bid up on a lot of speculation (even more than usual) ahead of the Coinbase IPO and all this froth has evaporated like a lot of hot air. There has also been a cluster of regulatory reports and rumours that point to a clampdown and tighter regulation. JPMorgan analysts led by the closely-followed Nikalous Panigirtzoglou say the rollover in prices has been led by a steep liquidation in speculative futures positions. “Momentum signals will naturally decay from here for several months, given their still elevated level,” he says.

Shares in Coinbase are in for a hit should cryptos go further south. Also, Cathie Wood’s ARK Innovation ETF is still loading up on COIN – watch this one ,too. The Coinbase listing – the ultimate poacher-turned-gamekeeper moment – might have been the high watermark for Bitcoin.

I refer to two points we highlighted when Coinbase registered to go public:

1. Earnings are inextricably tied to crypto prices. This may be obvious, but it is interesting to see in black and white. “Our total revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform. If such price or volume declines, our business, operating results, and financial condition would be adversely affected.”

2. More than anything it’s highly dependent on Bitcoin. A majority of Coinbase’s net revenue is from transactions in just two crypto assets: Bitcoin and Ethereum. For the year ended December 31, 2020, Bitcoin, Ethereum, and other crypto assets represented 70%, 13%, and 13% of assets on the platform respectively. “If demand for these crypto assets declines and is not replaced by new demand for crypto assets, our business, operating results, and financial condition could be adversely affected” says the filing.

Caveat emptor and all that.

Excess is good for the stock market

Morning Note

Me, You, Madness…no it’s not a story about Roaring Kitty, GameStop and Melvin, though someone has to make that into a film (Michael Lewis will be writing the novel already, I’m sure). It’s actually a 2021 film starring Louise Linton, wife of ex Treasury secretary Steve Mnuchin. I have not seen it, but I have seen the trailer. The setup sounds fun – Linton plays a psychopathic hedge fund boss. But while it contains just everything you can cram into a feature film; it looks exceptionally bad. So bad it’s actually good. Maybe. How it ranks in the canon remains to be seen. It’s really a vanity project, which is really a form of excess that we see in lots of corners of the market right now – think Tesla, the meme stocks, Bitcoin (just don’t include the FTSE…).

Biden’s $1.9tn stimulus package is probably excessive. t’s certainly full of waste, full of ways to prop up failing businesses and deliver helicopter money to a lot of people who don’t really need it. The economy is rebounding anyway. Jobs are coming back. A lot of the money will find its way into things like paintings, cars or fine wine. It will also find its way into stocks, or crypto-assets, or even non-fungible tokens (NFTs).

It will also find its way into paying down debt, and this is huge. The US government is embarking on a massive debt transfer from households to government. It can unleash huge potential by transferring the burden from productive capital (private) to unproductive (public) and is potentially one of the most explosive forces in capital markets in several generations. This transfer of debt will unleash entrepreneurial spirits that would otherwise be restricted. I fail to see how it do anything but increase asset prices, including stocks – despite the rise in yields. It allows households to take on more debt, start businesses and buy more stuff. It also lets them invest in stocks directly. The craziest thing is that it won’t help inequality- poor folks need the money for bills, food etc. Middle class folks will put the money to work. Those without big outgoings will reduce debt so they take on more risk in future because they’re not saddled with big debt obligations like student loans. We’re going to be hit by a massive surge in growth and bond yields will spiral. Inflation will spike and unless the fed gets a grip, it will lose control of inflation. I feel like we’re at the start of a massive economic boom, at least in the US, where policy makers have been vastly more ambitious than they have elsewhere.  I might be over-egging the pudding, but I sense people don’t appreciate just how important this debt transfer is going to be for the structure of markets and the economy.

Inflation is dead. Inflation is temporary… 

Year-on-year comps will start to show inflation rising. The NY Fed’s Empire State Manufacturing Survey yesterday contained something interesting in its inflation component: “Input price increases continued to pick up, rising at the fastest pace in nearly a decade and selling prices increased significantly.” Other datasets have shown input prices starting to inflate at the fastest pace in years.

Yesterday I touched on the way [some] central banks seemed kind of unconcerned by the rise in yields – last time he spoke Powell didn’t take the opportunity to push back against the rise in yields (no hint of a Twist), and the BoE’s Bailey said yields are rising because of growth. And now we have the RBA – the first to blink by stepping up asset purchases to counter the rise in bond yields – saying in the minutes to its last meeting that the gyrations in bonds are not that significant. And now the ECB – after another communication failure by Christine Lagarde – says yield curve control is unnecessary. ECB chief economist Philip Lane pointed out to the FT that the is not like the last crisis with years of lost output. Which means CBs don’t need to worry about taming yields in the same way.

The mantra seems to be that inflation – previously thought dead – will only be temporary and yields are just moving up because economic activity will hit 2019 levels this year. It’s just not that simple: yields reflect the fact that there is a lot more cash sloshing around – US bank reserves have doubled to about $3.4tn since the start of the pandemic. More stimulus, more growth, more money in the system, more debt issuance – yields are marching higher for number of reasons but mainly reflect growth expectations, inflation expectations and issuance – both real and expected. The extent each exerts a pull on yields (and the extent to which each is affecting the other) is obviously up for a lot of debate and a lot harder to measure. But what seems clear to me is that yields are facing a lot of upwards pressure. Then we have market functioning elements like extending SLR – failure to extend could see a heap of Treasuries come onto the market, making things more volatile.

But I think the big question that we are yet to really answer is how much markets are worrying about debt. I’ve banged on a lot about MMT before – deficits don’t matter and all that – not with any real view on what we should be doing, but rather with an interest in the debate about how we approach fiscal and monetary policy. If markets really are worried about the debt and their ability to absorb all this issuance, then it probably does have some important long-term implications, such as whether you can keep running perpetual deficits, can you always just increase the debt ceiling, and should you look to balance the books? How quickly do you suck the money back out of the system? And with the Democrats gaining those Senate seats in Georgia there is a lot more stimulus coming over the hill.

The back up in long end real rates took off on January 5th – after the Georgia runoffs – indicating people think issuance is a factor.

The back up in long end real rates took off on January 5th.

Inflation expectations are at multi-year highs.

Inflation expectations are at multi-year highs

Stocks in Europe took the cue from a positive session on Wall Street, with the main bourses mounting a fresh stab higher after yesterday’s early promise somewhat fizzled out in the latter part of the session. Positive Zalando and VW updates provided comfort to the Stoxx 600, whilst the DAX rose 0.6% in early trade. The FTSE 100 trades higher with a fresh attempt to clear the big resistance around 6,800 – near-term trend support is about to run into this level so a big test lies ahead with a possible leg up should 6,800 finally be taken out with conviction. Overall the mood in Europe was probably constrained yesterday by several countries halting the AstraZeneca vaccine, but this should prove a major constraint for the market.

The FTSE 100 trades higher.

Did you doubt that the arrival of ‘stimmy’ cheques would do anything other lift stocks? Yields didn’t really do anything so there wasn’t that immediate stress for the growth end of the market. Investors are looking at the yields and probably thinking yes it means multiple compression, but then you have to look at the $1.9tn coming over the hill at a moment of a strong cyclical recovery as fresh juice. US 10-year notes hovered around 1.6%. The Nasdaq 100 ended up 1% and the best of the induces after a big rally into the close. The Dow Jones rose 0.5% to a fresh record high as it notched its 7th straight daily gain. The S&P 500 also made a fresh ATH after rising 0.65% – its 5th straight day of gains. Futures point to another higher open.

Tesla rose 2% despite the company saying that Elon Musk’s title was changing to Technoking of Tesla, whilst CFO Zach Kirkhorn would henceforth be known as ‘Master of Coin’. GameStop sank almost 17%, AMC Entertainment rose 25% as it embarks on reopening cinemas. Keep your eye on these meme stocks as stimulus cheques could do a lot of work for them.

Yields remain the big threat to daily gains – if you see Treasury yields pop it will rock the market, but longer-term stocks can handle higher rates and unless there is another exogenous shock or a meltdown in funding markets like we saw with the repo stress a couple of years ago [watch that SLR decision], the path of least resistance is up. The Fed meeting this week is the clear risk event for yields but today we also have US retail sales to watch.

Sterling retreated to a one-week low vs the dollar. GBPUSD declined to around 1.3830 and may seek a test of the 50day SMA. The yield on 10-year gilts spiked to 0.86%, the highest in a year, but has this morning retreated back under 0.8%.

Sterling retreated to a one-week low vs the dollar.

Bitcoin trades higher this morning with the 200-hour SMA offering the support. MACD bullish crossover seen.

Bitcoin trades higher this morning.

Old Yellen goes big, Netflix surges on subscriber adds, buybacks, Burberry shares up on margins, Asia

Morning Note

Shares traded mostly higher in Europe following a positive start on Wall Street on Tuesday as traders returned from the three-day weekend to some upbeat earnings from Goldman Sachs and Bank of America to send the S&P 500 up 0.81% and the Nasdaq +1.53%. Janet Yellen’s Senate hearing confirmed that that stimulus is the order of the day and ‘fiscal sanity’ will be discussed, but not yet. She stressed that worrying about battered finances and raising taxes – the ‘who’s going to pay for it all’ question that MMT’ers say we should not be asking – would be for another day once the economy has recovered. By some measures that could mean years, but it underlines that the new administration is pushing for maximum relief and a period of fiscal expansion. I doubt she’ll ever admit to fully embracing MMT, but we in many ways already there.

For now, as far as equity markets are concerned, it seems as though investors are shuffling the deck, rotating in and out of sectors ahead of the next big move for the broader market. Joe Biden will be inaugurated as the 46th president of the United States today. The end of the Trump era will be marked by a changing of the guard in Washington, but will we see much change on Wall Street and in corporate America? Some corners of the market may look rather different in 4 years’ time.

Netflix shares surged 12% in after-hours trade after it posted a stronger-than-expected rise in net subscribers and said it’s close to returning cash to shareholders via share buybacks. Subscriber adds rose to 8.5m in the final quarter, ahead of the 6m or so expected. Lockdowns across Europe starting in November and surging cases globally probably helped cement demand, whilst churn has not been as much of a problem as feared. Free cash was +$1.9bn in 2020, though this can be mostly explained by delayed production costs due to the pandemic whilst revenues rose on subscriber additions. And whilst 2021 will be negative, it plans to be cash-flow positive going forward from 2021, allowing it to start to return cash after raising $15bn in debt over the last decade to finance expansion. Netflix’s content library may be smaller than in the past, but the strong year has been boosted by big hits like ‘The Queen’s Gambit’, ‘The Crown’ and ‘The Midnight Sky’. EPS was a little light at $1.19 vs $1.39 expected, but investors are content to look through this when subscriber adds are strong, whilst the prospect of buybacks is a clear tailwind for the stock. The strong performance by Netflix appeared to bolster the broader FAANGs with big tech enjoying a solid bump yesterday.

Elsewhere, the dollar eased back further as the near-term rally lost more steam, with the dollar index retreating further away from its 50-day simple moving average. EURUSD pushed up to 1.21580 as the 50-day SMA held firm. Cable also nudged back up with GBPUSD rallying above 1.360 with bulls likely shaping up for a return to 1.37 and clear the Apr 2018 peaks again.

Gold has inched back to $1.850 but still trades a pretty narrow range since the big drop on Jan 8th. Bulls eye the 50-day SMA at $1,860 as US real rates (10-year TIPS) have swung back down by around 6bps or so in the last two days, whilst the dollar’s easing off its peaks has provided some lift. Oil was firmer with WTI above $53 again as markets digested the report from the IEA, which lowered its demand forecast for 2021 but stressed that “a widespread vaccination effort and an acceleration in economic activity is expected to spur stronger growth in the second half of the year”, adding that: “Much more oil is likely to be required, given our forecast for a substantial improvement in demand in the second half of the year.”

Equities

Burberry posted a tough set of headline sales numbers, but margins are looking better. Sales dropped 9% on a like-for-like basis, worse than the –7% expected, but the focus on reducing markdowns is helping shore up profits, whilst demand recovery in Asia is encouraging. Burberry has taken a hit as luxury was affected by the pandemic, with footfall down across the board and sales in Europe particularly affected by the collapse in Asian tourist visits. But there have been clear signs of improvement as resilience in key markets has been impressive. Efforts to reduce markdowns and the push to attracting younger, richer customers through celebrity endorsements from the likes of Kendall Jenner and Marcus Rashford is helping. Clearly the closure of physical stores as lockdown restrictions re-emerged towards the end of last year has affected sales, but direct-to-consumer online channels are more profitable.

At its half-year report in November, Burberry reported 31% revenue fall with adjusted operating profit down 75% and adjusted diluted EPS down 88% (reported diluted EPS down 66%). But it noted that recovery was underway with sequential improvement in comparable store sales to -6% in Q2 FY2021 from -45% in Q1 FY2021 and returning to growth in October. Today is records strong performance in Asia-Pacific in Q4, with sales +11% led by Mainland China and Korea. Europe, Middle East, India and Africa sales –37% on collapse in tourism. Americas –8% down to price mix changes.

Burberry remains a strong brand in the luxury space with room to appeal to a broader consumer base over the coming years. The strategy to focus on up-market and full-price sales seems to be paying off and investors agree – shares rose 5% despite the worse-than-expected fall in sales. Also given the consolidation in the sector, Burberry may seem like a potential target with shares still trading at a discount to peers.

Retail remains a mixed bag depending on the corner of the marketDixons shares fell a touch despite a peak Christmas trading update showing decent growth in Electricals with LFLs +11% across the group as locked-down consumers splurged cash on big TVs and gaming consoles. Online market share +8% is a positive and AO World shares fell –2% perhaps as a result. The real problem remains in Mobile, where total revenues fell –40% with restructuring ongoing in Carphone Warehouse.

WH Smith shares rose over 6% after December saw its High Street division recover to 92% of 2019 levels, up from 82% in November as the country was hit by a broad lockdown. Sales in January are at 70% of 2019 levels so far. Travel – where Smiths has been making its money of late – is trading at about 36% of 2019 levels. Demand in the US – where there is substantially more domestic internal air travel – has recovered more quickly than in the rest of the world. Management say they generated cash during November and December and ended December with a stronger cash position than anticipated with liquidity of £90m, which was “materially ahead of our original plan”.

Stocks nudge higher, HSBC rises on dividend hopes

Morning Note

Stocks in Europe ticked higher in early trade on Tuesday after a mildly down day on Monday. The FTSE 100 added 40 points to 6,760, rising 0.6%, while the DAX added 65 points to 13,910, a gain of 0.5%. However early gains were pared after an hour of trade. Asian shares outside of China rose, with Tokyo +1.4% overnight and US futures also climbing. US markets reopen after a three-day weekend with attention shifting to some important corporate earnings (Goldman Sachs, Bank of America, Netflix) and the inauguration tomorrow of Joe Biden and the actions he takes during his first few days in office. Emboldened by the Georgia run-off wins, Biden is going to push hard early. Weaker forecast oil demand for 2021 may also weigh on sentiment through the rest of the session.

 

A triumvirate of tough Biden picks for key regulatory and policy roles indicate Wall Street is going to have a prickly relationship with the new regime. The appointments of Gary Gensler to chair the Securities and Exchange Commission (SEC) and Rohit Chopra to head the Consumer Financial Protection Bureau (CFPB) indicate a leftist agenda being pursued by the Democrats that will focus on things like executive pay, corporate racial and gender diversity and climate change. Trump-era deregulation is over and we see a return to the Obama-era meddling. They join Sherrod Brown, the new chair of the Senate Banking Committee who has previously called for a break-up of the big banks and return to the Glass-Steagall act, in three key positions affecting financial markets. Brown said Chopra would ensure the CFPB “plays a leading role in combating racial inequities in our financial system”. 

 

Meanwhile, Biden’s pick for Treasury secretary, Janet Yellen, is going to take a ‘go big or go home’ approach to policy. The former Fed chair appears before the Senate Finance Committee today. It’s expected she will call for “big” action on the crisis – what does this mean exactly? Does it mean going further down the path of modern monetary theory? It may be moot – the pandemic has effectively thrust MMT onto the US without much debate. Open embracement of the policy by Treasury and Fed is the next logical step. Her comments later today could be market-moving.

 

The US dollar retreated – speculators remain heavily short even after a bump up in the last month. The dollar index pared gains after flirting with the 50-day simple moving average, whilst EURUSD has bounced back above 1.21 after finding support on the 50-day line at 1.20750. GBPUSD eased back above 1.36. 

 

Oil slipped lower after the International Energy Agency lowered its demand forecasts for 2021, warning that pickup in oil demand has been curtailed by new lockdown measures. The IEA said it thinks oil demand will recover by 5.5m barrels per day this year to 96.6m, a downward revision of 0.3m bpd. It underscores the rocky recovery ahead as demand recovery will be patchy and hinges on vaccines. Nevertheless, looking out beyond the first half of the year, demand recovery should really start to bounce back. WTI crude moved under $52.50 in early European trade after the release.

Equities 

 

AO World was one of the biggest gainers on the FTSE 350 last year thanks to consumer spending habits affected by the pandemic. But today shares have fallen 8% after it warned of “significantly higher costs” as it tries to “negotiate some of the operational challenges of working in a Covid-compliant environment”. More drivers, more warehouses space all costs money. They’ve also seen higher cancellations of mobile and lucrative. warranty contracts. This indicates near-term profitability is likely to be lower than thought. 

 

Nevertheless, demand remains very strong, with the company enjoying its strongest ever peak trading period over Black Friday and in the run-up to Christmas.  In the three months to 31 December 2020, management record UK revenue growth of +67.2% to £457.3m and of +77.4% to €73.6m in Germany. 

 

Meanwhile, bereft of pubs, cafes and restaurants, consumers are turning to sweet and savoury packaged delights from Premier Foods, like Mr Kipling cakes, Bisto gravy and Ambrosia custard.  Q3 Group sales up +9% and up +12.5% year to date, driven by 90% growth in online in Q3. Increased investment in brands means management expect trading profit to be in the range of £145-£150m this year and net debt/EBITDA to fall below 2.0x by the year end. Shares fell a touch in early trade. 

 

Miners were higher after Rio Tinto reported iron ore shipments slightly ahead of forecast. Rio rose +0.7%, with Anglo American +1%. 

 

HSBC shares rose 4% after chairman Mark Tucker said the bank hopes to resume paying dividends as soon as possible. Chunky returns possible with a meagre $0.22 dividend in 2021 offering about 4% yields at current prices. Shares have been on a steady march higher since top shareholder Ping An Asset Management upped its stake in September. Standard Chartered fell over 1%.

Joe Biden declared president-elect, stocks rally

US Presidential Election

Joe Biden has been declared president-elect, but Donald Trump is refusing to concede. Markets are not particularly fussed and see some clear light – relative clarity is providing a boost to risk assets.

Stocks enjoyed the best week since April, though there was some payback on Friday as traders consolidated gains.

The S&P 500 rallied 7% over the five sessions, but this did come after just about the worst pre-election week for stocks on record. Investors were shifting a lot of flow into lower volatility debt markets ahead of the election to reduce exposure to stock market volatility, and this is now unwinding back into equities.

In particular, the Biden White House and split Congress ought to mean lower rates, lower inflation and this benefits Growth stocks, and gold.

The dollar index has slumped to its weakest since September 1st put tried to rally early on Monday. A weaker dollar is supportive for gold, which broke out past $1,950. WTI (Dec) tracked sideways around the $38 mark.

Stocks in Asia rose, with the Nikkei up 2% and Hang Seng rising over 1%. Stocks opened firmer in Europe with the bullish trend asserting itself as Biden’s triumph seems all but assured.

The FTSE 100 rallied 1.5% to 6,000, whilst the DAX rose 1.7% to 12,700 and the Stoxx 50 returned to 3,250. US futures indicate Wall Street will open higher after a lacklustre session on Friday.

It would take a lot of big and unlikely legal victories for Trump to turn the result now. Recounts are likely as are multiple legal actions – but the lead for Biden is such that it would imply some enormous voter fraud in several states. Safe Harbor Day is Dec 8th, by which date all states need to have decided who’s won ahead of the Electoral College votes on Dec 14th.

The MSCI All Country World Index hit a record intra-day high this morning. A Biden win is seen to be much better for international cooperation, an end to the Trump-era isolation and critically, good for trade with the potential for a reset in transatlantic relations probably the most exciting aspect for investors. Whilst the Democrats won’t go easy on China, the relationship is expected to be steadier and escalation of tariffs seems less likely than under Trump.

According to weekend data Chinese exports jumped 11.4% in October, whilst imports rose 4.7% in USD terms. This was the best export performance since the pandemic and shows the recovery taking place outside of those countries where lockdowns linger.

It’s a good indicator that global demand is picking up in spite of pandemic restrictions in certain areas. This morning saw some decent German export numbers for September (+2.3%), but France’s economy is operating down 12% in November due to the lockdown.

After the relief rally, where next?

The Senate looks to be heading for Republican control, which removes a lot of the regulatory and tax overhang. Georgia run-offs will keep us unsure for a while longer, but the odds favour a very slim Republican majority in the upper house. Gridlock could be good for multiples and earnings longer term, but it’s not conducive to a large stimulus package right now.

And will Biden go for a more aggressive approach to containing coronavirus? We know that the greater the restrictions the greater the economic damage. Europe is enduring this reality again. A Biden win is probably good news for clean energy companies – the president-elect is committed to re-joining the Paris Climate Accord. Scottish Widows is offloading £440m in ESG unfriendly investments – the wind is blowing only one way.

Sterling was holding well above $1.31 but dollar weakness aside, the pound remains susceptible to a significant amount of Brexit headline risk.

Boris Johnson and Ursula von der Leyen said ‘significant differences remain’ in trade talks, citing fishing and the provisions for a level playing field. All the showboating and posturing should give way to pragmatism and the realpolitik of securing a deal before the New Year. The current ‘deadline’ is November 15th but talks could well extend beyond this. After tapping on 1.32 briefly early doors, GBPUSD dropped to 1.3140 by around 9am.

The FTSE 100 hit 6,000 and seems to have broken the downtrend. Next to 6,300, or will the downtrend reassert itself? The jump this morning marks a clear move off the 50-day simple moving average at 5,888 and the 100-day simple moving average at 6,011 offers resistance.

FTSE 100 performance fluctuating.

Who won the first US presidential debate?

US Presidential Election

Blonde Money CEO and XRay regular Helen Thomas recaps what we learned – or didn’t – from the first debate of the US Presidential Election between President Trump and Joe Biden.

Don’t forget you can catch the latest insight from Helen every week on XRay.

 

Week Ahead: Trump and Biden to face off in first Presidential Debate

Week Ahead

It’s a big week for financial markets, as the first US Presidential Debate kicks off on Tuesday. Donald Trump has spent a long time attacking ‘Sleepy Joe’s’ mental prowess, but has he accidentally set the bar too low for his opponent, or will Biden’s verbal blunders see him put on a poor show? 

After the two candidates have argued about the economy we’ll get another update on the labour market when the nonfarm payrolls report is published on Friday. 

Fireworks likely at first US Presidential Debate

Headline risks surrounding the US Presidential Election will shoot higher this week as President Donald Trump and Democratic nominee Joe Biden get ready for the first Presidential Debate on September 29th. Topics are liable to change in response to the latest new events, but at the time of writing the debate commission had announced the following itinerary: 

  • The Trump and Biden Records 
  • The Supreme Court 
  • Covid-19 
  • The Economy 
  • Race and Violence in our Cities 
  • The Integrity of the Election 

It’s a list of huge controversies, but even with such important topics, can the debates do much to swing the opinion of such a highly-polarized electorate? 

Biden leads Trump by 7.1% in the national polls according to our election poll tracker. Much has been made of his age and his verbal blunders and there’s a risk he’ll find himself flattened by Trump’s aggressive debating style. 

However, thanks to months of the President attacking ‘Sleepy Joe’s’ mental capacity, some Republicans fear that Trump has actually set the bar incredibly low for Biden. 

Nonfarm Payrolls

A few days after Trump and Biden have argued over the state of the economy, we’ll get another look at the health of the labour market. Payrolls growth slightly undershot forecasts in August, coming in at 1.371 million against expectations for 1.4 million. 

Of the more-than 22 million Americans who lost their jobs towards the start of the pandemic, 11.5 million of them are still out of work. There’s still a long way to go until the labour market has recovered and some analysts are expecting the pace of job creation to have softened again. 

Inflation, Caixin and ISM PMIs, finalised growth figures

Other data in focus next week includes Germany and Eurozone flash inflation reports and the China Caixin Manufacturing PMI. Thursday will be a busy day for US data, with core PCE, personal income, personal spending, initial and continuing jobless claims and the ISM Manufacturing PMI all in the docket. 

Finalised quarterly growth figures from the US and UK and finalised manufacturing PMIs from Eurozone member states and the UK could garner some interest if the figures differ notably from initial readings. 

Earnings: McCormick, Micron, PepsiCo, Constellation Brands

Tuesday sees the latest earnings reports from McCormick & Co before the New York open and Micron Technology after the close. 

McCormick has fallen -12% from its September 1st peak, but remains 65% above its March lows. Both hedge funds and company insiders have been selling the stock recently, which is trading -9% below its average price target on Wall Street. 

Micron Technology, on the other hand, has a 27% upside, although it has also experienced heavy selling in the past quarter. 

On Thursday PepsiCo and Constellation Brands both report before the opening bell. After the March recovery PepsiCo has struggled to hold above opening levels and is currently down over -4% on the year. You can download the latest research on the stock by Thompson Reuters in the platform. 

Constellation Brands is virtually flat for the year. Analysts see a 9% upside for the stock. 

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

17.00 UTC 28⁠-⁠Sep Blonde Markets
17.00 UTC 29⁠⁠⁠⁠-⁠⁠⁠⁠⁠⁠⁠Sep Webinar: Money Management and Trading Psychology
11.00 UTC 30⁠⁠⁠-⁠⁠⁠⁠⁠⁠⁠Sep Midweek Lunch Wrap
17.00 UTC 01-Oct Election2020 Weekly

Key Events this Week

Watch out for the biggest events on the economic calendar this week. A full economic and corporate events calendar is available in the platform.

23.50 UTC 28-Sep Bank of Japan Summary of Opinions
Pre-Market 29-Sep McCormick & Co – Q3 2020
12.00 UTC 29-Sep German Flash Inflation
14.00 UTC 29-Sep US CB Consumer Confidence
23.50 UTC 29-Sep Japan Preliminary Industrial Production / Retail Sales
After-Market 29-Sep Micron Technology – Q4 2020
01.45 UTC 30-Sep China Caixin Manufacturing PMI
06.00 UTC 30-Sep UK Finalised Quarterly GDP
09.00 UTC 30-Sep Eurozone Flash Inflation Data
12.30 UTC 30-Sep US Finalised Quarterly GDP
14.30 UTC 30-Sep US EIA Crude Oil Inventories
07.15 – 08.00 UTC 01-Oct Eurozone Final Manufacturing PMIs
08.30 UTC 01-Oct UK Final Manufacturing PMI
Pre-Market 01-Oct PepsiCo – Q3 2020
Pre-Market 01-Oct Constellation Brands – Q2 2021
12.30 UTC 01-Oct US Core PCE, Personal Income, Personal Spending, Jobless Claims
14.00 UTC 01-Oct US ISM Manufacturing PMI
14.30 UTC 01-Oct US EIA Natural Gas Storage
01.30 UTC 02-Oct Australia Retail Sales
12.30 UTC 02-Oct US Nonfarm Payrolls Report
14.00 UTC 02-Oct Finalised University of Michigan Sentiment

US Presidential Election: To Vote, or Not to Vote – That is the Question

US Presidential Election

As the 2020 US Presidential Election creeps into view, the United States is a country divided. With polarisation increasingly prominent, and ever-stronger partisan loyalty, the famed ‘floating voter’ is nearing extinction.

Whilst almost 40% of the electorate identify themselves as independents, these figures hide a residual bias which exists in most. Recent research has found that 93% of the electorate have some sort of partisan lean, with only 7% considered truly neutral. This illustrates the desire of many American voters to be considered independent, even if they are almost certainly going to vote for the same party in every instance.

And yet, conventional wisdom tells us that the most successful campaigns are those which reach out the middle ground and win over these floating voters. If the aforementioned research is correct, such a strategy may no longer be effective.

Instead, we suggest that turnout is the key to victory in modern US elections. The most important decision a voter can make is not who to vote for – for the vast majority this is a foregone conclusion. Rather, the voter choice that really matters is whether to vote at all.

One need only look back to 2016 to exemplify this point, where Hillary Clinton lost the election by less than 100,000 key swing state votes. By comparison, 4.4 million people who voted for Obama in 2012 didn’t vote in 2016, more than enough to overturn Trump’s wafer-thin victory.

Some research has even suggested that, had turnout remained at 2012 levels, Clinton would have won 323 electoral college votes – enough to deliver her the White House comfortably. In states such as Michigan, Wisconsin, Pennsylvania, Florida, and North Carolina, it was a failure to turn out their own voters which scuppered Clinton, not a failure to win over the centre.

Can Democrats recover African American vote?

The challenge for the Democrats in this election year, both at the Presidential and Congressional level, will be to recognise this as the root of their failure, and to take action in response. In particular, rebuilding African American turnout could prove decisive, after the 7% drop which occurred between 2012 and 2016.

Perhaps Biden’s choice of VP is a recognition of the importance of African American turnout. Although Kamala Harris is unlikely to provide an Obama-sized boost to African American enthusiasm, she may go some way to bridging that gap.

This is especially likely in the context of the Black Lives Matter movement, which could also help to increase turnout among minority demographics.

Which campaign will adapt best to mail-in ballots?

The prominence of mail-in ballots could throw a spanner in the works, though, with campaigns having to radically change their Get Out the Vote operations in response to the new circumstances.

Whereas previous elections have seen a focus on last-minute voter outreach, the early registration deadlines will mean that a longer-term strategy is required. The campaign which adapts to these changes most effectively will gain a critical edge come election day.

To vote, or not to vote: that is the question. The answer will decide who resides in 1600 Pennsylvania Avenue come 2021.

US election playbook: navigating the volatility with 40 days to go

US Presidential Election
  • Temporary dislocation
  • Too many variables
  • Bigger risks ahead

Given the once-in-a-lifetime pandemic, the US election is being held in exceptional circumstances. All else being equal though, we can deduce something about how current polling might play out. The market consensus is that a Biden win and Democrat clean sweep will lead to higher taxes and regulatory risk for a large number of corporates, which will hurt equities.

There are however plenty of other ways in which the market might like a Blue-nami, from pragmatic trade policy to combined loose fiscal and monetary policy.

Trade

Could Biden open up trade with China again? The Democrat candidate is taking a hard line on China – which is playing well with both sets of voters – but will he become more emollient once in office?

Tony Blinken, a senior foreign policy adviser to Biden, said fully ‘decoupling’ with China as urged by Donald Trump is ‘unrealistic’ and ‘counter-productive’. Biden will instead reset ties with China while seeking to redress unfair practices on trade and IP. However, it will be difficult for Biden to withdraw Trump’s tariffs immediately, without gaining significant concessions.

Biden has to play the hand Trump dealt, but he might seek to drive greater consensus with China and work out a more pragmatic trade policy.

MMT

Biden may not have expressed much support for Modern Monetary Theory – in fact he was once a fiscal hawk in the old style – but under a Democrat Congress and White House there would be no rush to reduce the deficit.

In fact, Biden’s economic stimulus plans entail more borrowing. Whilst it is a stretch to suggest that Biden is a supporter of MMT, the economic and social backdrop has changed drastically in recent years and it is gaining traction in more corners of the Democrat machine.

Moreover, the Fed’s recent average inflation targeting shift opens up a new front for MMT proponents in explicitly pushing full employment as the primary goal of monetary policy.

The Fed

At Jackson Hole the Fed announced a policy shift that ought to have a material impact on expectations around rates and inflation. The Fed is taking a more practical approach than in the past when it has been guided by theories about maximum employment, the Philips Curve and inflation.

Instead of saying that the economic outcomes need to fit its models – which have always been nothing more than a best guess – it will let the outcomes drive the policy. Some would say this is a step towards fully embracing MMT, even if Powell has been against this approach in the past.

The fact is that the crisis has thrown MMT from economic theory to economic practice without any real debate. Powell has embraced a central tenet of MMT – why should millions of people be thrown on the economic scrapheap and left unemployed as the price to pay for low inflation.

Under a Democrat-led Congress and White House, MMT proponents will gain a louder voice, with implications for federal economic policy.

Overall, whilst Biden’s tax policy might be tougher on Wall Street, trade and monetary policy could be easier. But it is not quite so straightforward as that. With polls close in the key battleground states and huge uncertainty over the potential impact of postal votes, it is currently difficult to put a price on any outcome, which in turn makes it hard to trade the election per se.

Going long or short based on the outcome is far too simplistic and you could just as easily call it wrong as get it right. What we can say is that the pandemic, the economic recovery and the monetary policy response are longer term going to matter much more. And so, all else being equal is far too simplistic a view to take in what’s a very complex situation.

Will the election outcome be contested?

The only thing the market wants is to get the election out of the way – the only real danger would be a long period of legal disputes post-election, but again this ought only to create volatility at the time and would eventually be forgotten once it all shakes out.

Veiled threats by Trump to not accept a Biden win are probably over-analysed. The Supreme Court (and Secret Service) would see to that. It turns out the most antagonistic election in a generation for the people of America might well end up merely a short term ripple when it comes to markets, given everything else they have to contend with in the long term.

With 40 days to go, the race is tight and in the major battlegrounds it is too close to call. Markets will be volatile and dislocations will occur that present opportunities. The best approach is to be agile enough to contend with both outcomes and no clear winner on the morning of November 4th.

You can follow our election coverage here.

Congressional Elections: Why do they matter?

US Presidential Election

While the race for the White House has received outsized attention, developments such as the failure to reach a new coronavirus relief bill and the looming threat of a government shutdown have heightened the stakes in the battle for control of Congress.

The House of Representatives looks firmly in the hands of the Democrats after the inroads they made in the 2018 midterms. Control of the Senate is therefore crucial. It’s currently in Republican hands and the Democrats would need to win four seats of the twenty-three up for grabs in order to gain an overall majority.

With Biden ahead in the Presidential polls, can the Democrats feel confident about the Senate?

With party now trumping candidate, the general momentum towards the Democrats should give them some hope. 2016 was the first year on record where every single state holding Senate elections voted for the same party for Senate as for president.

It’s no longer the case that voters split their ticket when they go to the polls. For example in 1980, despite Republican Ronald Reagan winning the White House, 12 of 31 Senate seats went to the Democrats.

Now though, the electorate is so polarized that party dominates across elections. If you voted Trump, you vote Republican across your ballot paper.

This means state-wide elections have increasingly been nationalized: Senators struggle to separate themselves from their national parties. This has been exacerbated under President Trump, where almost every Republican Senator has embraced him of fear of losing his conservative base – this is especially the case for the Republican Senator in Arizona, Martha McSally, who has pivoted to the right and linked her fate inextricably to Trump’s.

Rare candidates, like Maine Senator Susan Collins, have been able to maintain an identity distinct to the national party’s and keep split-ticket voting alive – but even Collins’ long-time local reputation as an independent, in a centrist state with a history of electing moderate women, is under threat for her polarizing pro-Trump voting record. She backed Brett Kavanaugh for his confirmation to the Supreme Court, in support of her President – and saw her popularity with female voters plummet.

Replacement for Ruth Bader Ginsburg becomes key election issue

With any coronavirus relief unlikely to pass before the election, control of the Senate will be crucial to any alleviation of the recession. This has been exacerbated by the death of Supreme Court Justice Ruth Bader Ginsburg.  Party politics will now be bogged down in finding her replacement, rather than finding a fiscal compromise.

While Trump has made this a key issue, going as far as releasing an unsurprisingly political list of possible appointees, Biden has in turn also made this a focus of his candidacy, promising to nominate a historic first: a black woman. Given the increasing frequency of constitutional hardball around Supreme Court confirmations, control of the Senate will be a prerequisite to a successful nominee.

Given that the states in the Senate up for re-election are very Republican, this development will energise the base, reducing the likelihood of a Democratic majority.

However, on the Presidential level, the blue wall which deserted Hillary Clinton in 2016 looks likely to be rebuilt, given the intensely partisan nature of the battle to come. Mitch McConnell should be pleased by this weekend’s news, Donald Trump should not.

With both sides becoming more entrenched the elections look set to deliver a split between the legislature and the executive. With a more polarized Congress, key platform items promised by both candidates will be tougher to achieve. Expect partisan  investigations and tense hearings to persist no matter who wins.

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